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Islamic Investment Funds

By
Muhammad Farhan ul Haq Usmani
Assistant Manager
Product Development & Shariah Compliance
(PDSC)

November 27th – December 2nd, 2006


Presen Outline
Presentation

• Definition “Investment Fund”


• Definition “Islamic Investment Fund” (IIF)
• Basic Conditions for IIF
• Types of Funds
– Equity Fund
– Ijarah Fund
– Commodity Fund
– Mixed Fund
• Conclusion
Presen fund
Investment

Definition

“ A joint pool wherein the investors contribute


their surplus money for the purpose of its
investment in any profitable venture”
Presen Fund (IIF)
Islamic Investment

Definition

“A joint pool wherein the investors contribute


their surplus money for the purpose of its
investment to earn ‘Halal’ profit in strict
conformity with the precepts of Islamic
Shariah.”
Presen
Basic Conditions for IIF

• Instead of a fixed return tied up with their


face value, they must carry a pro-rata profit
actually earned by the fund.

Therefore,

• Neither the principal nor the profit (tied up


with the principal) can be guaranteed.
Presen
Basic Conditions for IIF

• The amounts so pooled together must be


invested in a business acceptable to Shariah.
It means that not only the channels of
investment, but also the terms agreed with
them must conform to the Islamic principles.
Types ofPresen
Islamic Funds

• Equity Fund

In an equity fund the amounts are invested


in the shares of joint stock companies.
The profits are mainly derived through the
capital gains by purchasing the shares
and selling them when their prices are
increased. Profits are also earned through
dividends distributed by the relevant
companies.
Presen
Equity Fund

Stock Screening Criteria

Any stocks permissibility for trading depends


on its passing through the following
screening criteria of stocks.
Presen Criteria
Stock Screening
 Business of the Investee Company: The basic
business of the investee company should be Halal.
 Debt to Total Assets: The interest bearing debt of the
investee company should not exceed 40% of total assets.
 Illiquid Assets to Total Assets: Total illiquid assets of
the Investee company as a percentage of total assets
should be at least 20%.
 Investment in Shariah Non-Compliant Activities:
Total investment of the investee company in Shariah non-
compliant business should not exceed 33% of total assets.
 Income from Shariah Non-Compliant Investments:
The income from Shariah non-compliant investments
should not exceed 5% of gross revenues of the investee
company.
 Net Liquid Assets vs. Share Price: The net liquid
assets per share should be less than the market price of
the share.
Other Issues Presen
in Shariah Compliance

Following Important Areas, that needs to be


taken care of, while managing an IIF are:

• Same Day Trading


• Approvals for Investments
• Investments/ Trading in Futures
• CFS/BADLA/COT
Presen
Islamic Investment Fund

• Ijarah Fund

In this fund the subscription amounts are


used to purchase assets like real estate,
motor vehicles or other equipment for the
purpose of leasing them out to their
ultimate users. The ownership of these
assets remains with the fund and the
rentals are charged from the users. These
rentals are the source of income for the
fund, which is distributed prorata to the
subscribers.
Presen
Islamic Investment fund

• Commodity Fund

In this type of fund the subscription amounts


are used in purchasing different
commodities for the purpose of their
resale. The profits generated by the sales
are the income of the fund, which is
distributed pro-rata among the
subscribers. All the rules of Shariah
governing sale must be fulfilled.
Presen
Islamic Investment Funds

• Mixed Fund

This is the type of fund where the


subscription amounts are employed in
different types of investments, like
equities, leasing, commodities etc. In this
if the tangible assets of the fund are more
than 50% then the units of the fund are
negotiable.
Presen
Islamic Investment Funds

Jazak Allah Khair

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